Results First Take: 3Q23 Business Update – Looming vacancy risks remains an overhang
- Slight improvement in operating performance due mainly to the acquisition of the B&M portfolio
- Key positives: i) improvement in operating metrics due to addition of B&M portfolio, ii) existing portfolio remains relatively stable, iii) healthy gearing and low financing costs
- What we are watching out for: i) occupancy rate of Darmstadt Campus remains at c.25%, ii) potential vacancy at Berlin Campus after December 2024, iii) portfolio valuations at year-end following cap rate expansion
- Maintain HOLD with TP of S$0.45
| Key operational data | 3Q2023 | 2Q2023 | % Change | 3Q2023 | % Change |
| Portfolio occupancy (%) | 90.4% | 88.7% | 1.7ppt. | 96.5% | -6.1ppt. |
| WALE (years) | 4.9 | 5.0 | -0.1 | 4.6 | 0.3 |
| Aggregate leverage | 34.4% | 33.1% | 1.3ppt. | 30.6% | 3.8ppt. |
| Interest Coverage Ratio | 6.5 | 7.1 | -0.6 | 8.0 | -1.5 |
| All-in cost of debt | 2.0% | 1.9% | 0.1ppt. | 1.8% | 0.2ppt. |
Source: IREIT Global
What has happened?
In their 3Q23 business update, IREIT Global reported relatively stable operations. Notably, portfolio occupancy saw a 1.7 ppt increase on a q-o-q basis, primarily attributed to the addition of the B&M Portfolio on 5 September 2023. This portfolio includes 17 retail assets in France, all fully occupied, with an impressive WALE of 6.3 years. Furthermore, at the Darmstadt Campus, which had been vacant since November 2022, the new federal tenant moved into a 7,600 sqm space in August 2023, and IREIT is currently in discussions with several potential tenants, potentially lifting occupancy rate of the asset to c.48%. Meanwhile, at the Berlin Campus where DRV has extended their lease for six months (until December 31 2024), IREIT has undertaken a feasibility study and developed a refurbishment plan to transform the property into a multi-tenanted asset in preparation for the potential non-renewal by DRV. Gearing inched up slightly to 34.4% due to an additional EUR38.4m in loans used for the acquisition of the B&M portfolio. Impressively, IREIT’s overall financing costs only increased by 0.1 ppt q-o-q to 2.0%, which was better than expected. This positive result can be attributed to the fact that c.96.6% of loans have been hedged to fixed rates and no loans will be due for refinancing until January 2026.
Our views.
The improvement in operating metrics in 3Q23 was largely due to the addition of the B&M portfolio, while the existing portfolio remained relatively stable. We remain confident that IREIT is on track to deliver a DPU of 1.9 Ects in FY23 following the completion of the acquisition that is expected to generate a c.1% accretion (on a full-year basis). On the capital management front, IREIT’s credit metrics remain healthy with a gearing of only 34.4% and there are no refinancing requirements in the next two years.
However, we remain cautious on IREIT’s medium term prospects as occupancy at the Darmstadt campus is only c.25% currently, and the additional leases in discussions are still not firmed up yet. Moreover, there will be vacancy risks at the Berlin Campus from December 2024 in the event that DRV does not renew their lease, and some CAPEX would be expected to refurbish and reposition the property. Lastly, we foresee some revaluation losses in IREIT’s portfolio in 4Q23 as cap rates in Europe have expanded, and potential vacancies within the portfolio could lead to more downside in valuations. As such, we will be maintaining our HOLD recommendation with a TP of S$0.45.